Despite the rally in the broader market, SoFi Technologies (NASDAQ: SOFI) has struggled to keep pace and is down 24% year to date. The company has had a rough time since going public in 2020 and remains 73% below its all-time high.
There are good reasons for investors to feel optimistic about SoFi. It has diversified its business model and has achieved solid growth as it takes on traditional banks. However, there are some macroeconomic challenges, and the business is in the midst of a transition year. If you’re a current investor or considering investing in SoFi stock, you should know the following.
Reasons to buy or hold SoFi
In SoFi’s early days, it focused on helping people refinance and consolidate their student loan debt. This was its bread-and-butter business for many years — until the pandemic hit in early 2020. The federal government placed a moratorium on student loans, forcing student lenders like SoFi to reevaluate their business model.
Over the past several years, SoFi has branched out and now makes personal loans and provides banking services for customers along with fintechs and neobanks through its technology platform. A key part of SoFi’s evolving business model was the acquisition of Golden Pacific Bancorp in 2022 for $22.3 million. The acquisition gave SoFi a banking charter, allowing it to collect deposits and hold more loans on its books to capitalize on higher interest rates.
SoFi’s deposit base has more than doubled in the last year, reaching $21.6 billion at the end of the first quarter. Thanks to its high-yielding accounts, the company has done an excellent job of attracting deposits. Quarter over quarter, the company’s deposit base grew 16%, with 90% of those deposits coming from direct deposit members.
One differentiator for SoFi is its technology platform, where it provides banking-as-a-service for fintech and neobanks. The company has invested heavily in Galileo and Technisys, which provide back-end infrastructure for fintechs that don’t have banking charters of their own, allowing them to process payments and provide other banking services through SoFi.
Its growing financial services and technology revenues have helped SoFi post two consecutive profitable quarters as it continues to steadily grow its revenue.
Reasons to sell SoFi
While SoFi pivoted away from student loans it significantly grew its personal lending business. From 2020 to 2023, SoFi’s personal loan originations grew from $2.6 billion to $13.8 billion.
Many investors have expressed concern about the company’s credit quality; ongoing consumer weakness could weigh on SoFi’s loan book and lead to a revaluation of loans if losses continue rising. At the end of the first quarter, SoFi’s personal loan portfolio stood at $15.6 billion. Its net charge-off ratio (NCO) was 3.45%, up from 2.97% in the same period last year.
According to The Fly, Keefe Bruyette analyst Timothy Switzer has expressed concern that SoFi could see a steep rise in NCOs when it announces its second-quarter earnings at the end of this month. He noted that many investors don’t expect “the magnitude of the NCO acceleration that the firm projects.”
Is SoFi stock for you?
SoFi has done a good job of expanding its platform to include banking services, and its technology platform should help drive long-term growth. According to a report by Grand View Research, the banking-as-a-service market could grow by 16.2% annually through 2030.
However, the stock continues to face pressure in the near term from rising net charge-offs, which could weigh on the bottom line through the rest of this year. Not only that, but CEO Anthony Noto has called this a transition year for the company as it pivots away from lending and more toward those other financial services and technology segments.
SoFi faces risks that could weigh on it over the next few quarters, which could lead to higher volatility in the stock, so it’s not suitable for all investors. However, the company’s platform is well-positioned for long-term growth. If you can look past near-term headwinds, SoFi is a solid stock for risk-tolerant investors to buy today and add to over time.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
SoFi: Buy, Sell, or Hold? was originally published by The Motley Fool
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